With its draft recommendation, the BASB had attempted to provide some clarity around the definition of “turnover” and/or “other than non-recurring receipts”, but sadly failed to do so - quite the reverse. We determined that, in the draft recommendation, the receipts were not limited to profits, capital gains or fruits. The scope was therefore possibly greater than had initially been thought, which caused some upheaval on the part of many an advisor.
BASB recommendation 2019/11
Ultimately, the BASB returned to this issue with its final opinion of 16 October 2019, in which it largely confirmed its earlier draft. Thus, the meaning of receipts is: all receipts, irrespective of whether these constitute profit within the meaning of accounting carried out in line with the rules of double-entry bookkeeping.
What are the consequences for your partnership now?
The expanded definition of “turnover” as maintained by the BASB has led to many questions in the context of how a family partnership functions. After all, there are innumerable “exceptional receipts” that cannot qualify as “turnover” in our opinion. Let's just take loan repayments, the retail price of shares in the family company, receipt of capital reduction, etc. If these “receipts” were to be deemed eligible for inclusion in determining the turnover threshold of 500,000 euros, then by all accounts there would be a great many partnerships that would need to use double-entry bookkeeping.
It is noteworthy that the BASB, specifically as regards (family) partnerships, nonetheless supplied an example in its final opinion from which we could infer that exceptional receipts should instead be seen as non-recurring, and can therefore be ignored. The example concerns the following situation:
A partnership's equity consists of a shareholding and a bank account - the partnership has no debts. The partnership has maintained this shareholding, which consists of 9 percent of the shares in a public limited company, unchanged for many years and receives an annual dividend of 130,000 euros from this. During the financial year, a further dividend is received of 130,000 euros, a super-dividend is received of 400,000 euros and 1 percent of the shareholding is subsequently sold for the amount of 300,000 euros. The bank account generates interest of 300 euros during the financial year. The other than non-recurring receipts amount to 130,300 euros in this case.
We concluded that recurring should therefore be read as repetitive or on a regular basis, in the sense that the profitable actions and/or activities of the partnership are recurring (and are thus eligible for inclusion in determining the turnover), where these are regularly carried out by the partnership concerned. Consequently, receipts arising from the regular sale of shares (e.g. via the stock exchange) will be eligible for inclusion in determining the turnover in their entirety, regardless of their book value. The rather more speculative nature, as well as the easy purchase and sale process, of such transactions on the stock exchange in fact makes us suspect that receipts from this are recurring. Conversely, if the partnership sells (part of) the shareholding in an operating or holding company on an exceptional basis, then this will not constitute “turnover” on the part of the partnership.
Moreover, the BASB has clarified that a partnership's receipts that are of a one-off or exceptional nature do not need to be included in determining the turnover. Thus, a super-dividend apportioned in one particular financial year, in addition to the normal annual dividend paid by the company, will not need to be included when assessing the partnership's turnover. In this, the BASB appears to have paid heed to our observations, as recently set out in the specialist journal Accountancy Actualiteit (no 2019/13).
In the meantime, we would note that assessing the repetitive nature of the action remains a subjective business, for which a variety of interpretations are possible.
In addition, and despite the example mentioned above, it remains unclear just how far the notion of “receipts” stretches. The BASB limits its example by stating that interest on a bank account constitutes a receipt, which was already uncontested. But what about capital gains received, or repayment of capital on an investment portfolio held by the partnership? Or interest/dividends that had already been apportioned, but not yet paid? Are these receipts or not? This is impossible to derive from the BASB recommendation concerned, and will need to emerge in the future.
Finally, the recommendation briefly explains the entry into force of this legal obligation. Existing partnerships, established before 1 November 2018, are subject to these provisions from the first full financial year commencing after 30 April 2019. For partnerships whose financial year runs in line with the calendar year, this therefore means that the new rules will apply for the 2020 financial year. Partnerships established after this date will be subject to these provisions immediately, i.e. from the 2019 financial year.
The new insights provided by the BASB's final opinion addressing the accounting obligations of partnerships, among other things, are sadly limited. Assessing the recurring nature of a receipt remains, in our opinion, a matter for discussion. Moreover, it remains unclear in practice whether certain income (cf. repayment of capital, capital gains acquired) may qualify as receipts. For as long as clarity around this remains forthcoming, a restrictive interpretation of the notion of receipts would appear justified.
Where the partnership has a turnover of 500,000 euros or more and must use double-entry bookkeeping as a result, this will almost always necessitate the involvement of a professional. It goes without saying that this will inevitably lead to additional costs on the part of the partnership.
Nonetheless, there is still a future for partnerships. The fact that there are no circumstances in which a partnership's accounts need to be published makes it a highly desirable wealth planning tool for many people. Their broad freedom around articles of association and their private nature, along with their (limited) legal formalities, will continue to persuade many people (quite rightly) to harness a partnership as part of their wealth and succession planning.